The process of electrification, the pre-eminent engineering achievement of the 20th century, first took place in the little town of Muncie, Indiana and sparked the modernization of the U.S. In 1950 the average American home used approximately 138 kilowatt-hours per month; today the number is closer to 1,000 kilowatt-hours. But today, the industry currently faces challenges far greater than it has ever had to confront: global climate change, energy security, and the highly disruptive impacts of the smart grid. This will require changes in the industry’s main business models matched by changes in the quality and flexibility of utility regulation.
Chapter 2: Deregulation, Past and Prologue
Originally promised to reduce electric bills by up to 43%, the deregulation of the electric industry in the 1990’s is seen as something between a disappointment and an outright failure. The California Crisis of 2000-2001 and the unmet expectations of large price reductions have greatly diminished policymakers’ enthusiasm for reducing regulation further. However, in the wake of the smart grid and new policy imperatives, the role of competition in the energy industry will be redefined and new forms of deregulation will emerge.
Part I: The Smart Grid and Electricity Sales
Chapter 3: The New Paradigm
The electric power grid was designed and built as a passive system, but the smart grid will change this structure and introduce new control and service possibilities. Most importantly it will provide the ability to record hourly power usage, down to the individual customer appliance, and set different prices for power throughout the day. Other smart grid benefits will include the ability to incorporate new distributed generation and electricity storage resources. In combination with greater energy efficiency, the operating paradigm of the grid will be transformed.
Chapter 4: Smart Electric Pricing
Wholesale electricity prices vary throughout the day and retail pricing approaches enabled by the smart grid, known as dynamic pricing, will reflect these changes. The savings opportunities are large; dynamic electric pricing can reduce electric bills by 5 to 20%, even for customers who do not change their usage. Despite these benefits, customers’ dislike of volatile prices and the cost of installing smart systems create road blocks that slow the adoption of better prices.
Chapter 5: The Regulatory Mountain
Cost-benefit analyses of smart grid technologies are needed to compare customer value, impact on utility rates, and how customers and generators are charged for their use of the grid. The smart grid also provides some benefits that are hard to value, such as security, reliability, and environmental gains. These benefits must be matched with their costs, posing an extraordinarily difficult challenge for regulatory commissions. Regulatory challenges of this nature will determine how fast we are able to deploy and benefit from smart grid technologies, and regulators need much greater resources to address these challenges in a timely manner.
Chapter 6: The (Highly Uncertain) Future of Sales
Six major factors influence electricity sales: population, economic growth, the electrification of transport, higher electric prices, energy efficiency policies, and the onset of the smart grid. Overall, EIA projects that electricity sales will grow only 0.83% a year. When interactions between major drivers and new efficiency policies are considered, sales growth could be as low as 0.15% per year through 2030. Because the industry operates on very long planning cycles, the uncertainty surrounding sales is a major threat to long term investment.
Part II: Supply Side Challenges
Chapter 7: The Aluminum Sky
Transmission expansion is a prerequisite for incorporating low-carbon energy on to the grid and improving reliability. Because renewable energy resources are highly concentrated in specific regions of the U.S., as many as 30,000-40,000 miles of new transmission lines will be needed to transport these resources to electric users. While some suggest a nation-wide “supergrid” may be needed, this is probably unnecessary and would increase the costs of decarbonizing the system. The most important barrier to grid expansion is the absence of a process for planning and sharing the costs of large new lines – not transmission siting approvals.
Chapter 8: The Great Power Shift
Future supply scenarios for the addition of low-carbon energy sources will depend on the availability, performance, and cost of large-scale generating technologies. There are several options for reducing the carbon footprint for new coal plants. Potential supply scenarios will also depend on the possibility of a nuclear renaissance and future reductions in the cost of renewable sources. Natural gas and windpower will be the cheapest low-carbon sources for some time to come, but technological progress and political support will keep CCS coal and possibly nuclear in the mix.
Chapter 9: Billion Dollar Bets
Across the longer horizon, there are a handful of scenarios for how the industry’s supply mix might evolve. In Small Scale Wins the combined effects of demand response and energy efficiency eliminate the need for added upstream supply. In another more “business-as-usual” style scenario, Traditional Triumphs, coal with CCS and/or new nuclear plants become cost-effective sources for baseload power. Completely Green aggregates large and small scale renewable sources, along with demand response and energy efficiency.
I conclude that the most likely outcome is a scenario called Most of the Above. No one type of supply dominates. Low-carbon forms of natural gas and coal-fired power will remain substantial, though price-dependent, and large-scale renewables will gain a steadily larger share over time. Small-scale sources will also gain steadily, but will not displace large-scale power until much later in the century. Nuclear power’s future depends on the cost of building the next generation of plants now in the pipeline.
Part III: Business Models for the New Utility Industry
Chapter 10: Energy Efficiency: The Buck Stops Where?
Energy efficiency is widely considered to be the cheapest and most important resource in our national climate strategy. But what will it take to get serious about energy efficiency? And who should be in charge of driving the train?
Energy efficiency will be helped enormously by a price on carbon and more accurate electricity prices. However, price signals alone are simply not sufficient for realizing all cost-effective efficiency. To do this, we need direct investment in energy efficiency capital and institutions that reduce transactions costs and information barriers.
In the U.S., there are only two groups who can provide these key resources: state and local governments and utilities. Both groups have demonstrated the ability to lead. However, it is probably better to put utilities in the lead because they have access to the private capital markets, are less budget-constrained than governments, can be motivated by market incentives, and have very good customer relationships and service delivery capabilities.
Chapter 11: Two and a Half New Business Models
The electricity industry today consists of two structure-regulation-business model combinations, both driven by two economic forces: vertical integration and competition. Vertical integration has proven to be a very durable institution, but it is challenged both by the conflicting incentive to earn more profits by selling more power and the policy imperative to improve energy efficiency. The de-integrated, deregulated model is a more logical evolutionary path, but it faces resistance from deregulation’s spotty track record and the perceived benefits of continued regulation in the face of large climate policy uncertainties. The two likely business models for the investor-owned part of the industry that emerge from these forces are the Smart Integrator and the Energy Service Utility. In addition, expansion of municipal utilities and cooperatives is, in many respects, ideally suited to the industry’s new technology base.
Chapter 12: The Smart Integrator
The Smart Integrator is a future utility that operates the power grid and its information and control systems, but does not actually own or sell the power it delivers. Growing out of the regions of the U.S. where retail deregulation continues, the Smart Integrator will continue to offer state-regulated transport and information services, including dynamic price signals to generators, storage, demand response providers, and efficiency technologies. “Decoupling” of profits from sales can be used to change the incentives of the Smart Integrator to support energy efficiency, but questions remain as to the proper boundaries between Smart Integrators and private sector efficiency providers.
Chapter 13: The Energy Services Utility
The Energy Services Utility (ESU) of the future harnesses the benefits of distributed generation and energy efficiency programs to provide energy services to customers, such as heating and lighting, instead of selling commodity kilowatt-hours. The catalyst enabling this business model, which was first introduced by Amory Lovins and Roger Sant in the 1980’s, will be the smart grid. Smart grid technologies are the game changer that will allow utilities to measure and price the menagerie of energy services they provide.
Conclusion
In the end, a smart power industry will not be the product of the oncoming revolutions in control systems or generating technologies, grand as they are. It will be the result of provisioning the industry’s regulatory institutions for change. A new regulated business model is essential to transition the industry to much lower carbon intensity and an interactive power grid. State regulation must be reformed – not eliminated – to make energy efficiency a core business mission of regulated firms. This will require greatly improved regulatory institutions, bold technical progress, and very large investments. This is the industry’s consuming challenge for the of the next half-century.
